What if everything you were taught about economics & finance was wrong?

Reading Time: 5 minutes

Do we stop to question received wisdoms as often as we should? The stories, words, metaphors and concepts we use to describe things do matter. They define the cast of characters on (or off) the economic stage, perhaps implicitly relegating important areas to marginal or non-existent roles, without even thinking about it . Adjectives and metaphors subconsciously tell us what is good and what is bad. Sometimes it pays to stop & think , and ask questions.

I recently re-read the excellent “Donut economics” by Kate Raworth. It’s only got more relevant since it was first published in 2017, it’s a really comprehensive platform manifesto for a new kind of post-growth economics , complete with a patient , step by step expose of where 20th century style thinking goes wrong.

The idea of donut economics is that there is a broad sweet spot which provides a social foundation within the ecological ceiling of what the planet can provide.

some of the messages that really resonated with me and got me thinking:

Rethink the primacy of markets

Markets can be powerful. They can aggregate a vast number of preferences efficiently, and they can quickly improve cost and efficiency of new products faster than any top down program could. However they will also plunder natural resources relentlessly, pollute the environment as much a they can get away with legally, deepen inequality through exploiting the least powerful , concentrate power more and more, and lobby for their continued ability to do the above. And let’s not kid ourselves , there’s no such thing as “free” markets really. Regulatory capture, monopoly power, lobbying , vested interests and campaign finance are a thing.

A big part of Kate Raworth’s thesis is that markets can be effective if deployed narrowly, strictly limited and embedded within a broader society and natural environment – not prioritised above and ahead of all else as they often are.

Economics is not physics

The huge flaw at the heart of economics, Raworth says, is the fascination with “laws of motion” type concepts that can simplify complex systematic interactions down to linear, equilibrium type models. The seduction here lies in the simplicity and tractability. We hold tightly onto things that give as certainty in a complex world, no matter they are wholly inadequate or even misleading. The earliest concepts in economics like the supply/demand curve and equilibrium, or the rational assumptions underpinning economic actors don’t stand up to the slightest scrutiny. Of course we do know this, really, but we’re so used to brushing off the caveats to get to the answer that it’s easy to miss the fact that they really really do matter, and we can go badly wrong when we put too much store in these elegant but deeply flawed models.

Raworth suggests we reimagine the economy as a complex adaptive system – not thinking in terms of linear cause and effect, or neat equilibrium solutions but in terms of feedback loops. In terms of metaphors, a garden rather than a mechanical system of pulleys and levers.

The household sector & state

A big blind spot in conventional economic thinking is the role of the household , and the state as equal partners alongside markets. Perhaps no better way of seeing this than the famous Adam Smith quote “it is not the benevolence of the butcher, baker from which we get out dinner, but his self interest” . This quote leaves out the role of Smith’s own mother who not only raised him , but also cooked and prepared his meals for much of his adult life. Leaving out the household sector and only focusing on the butcher and the baker airbrushes out a huge swathe of the economy and this does matter. It took generations of mainly female economists to gradually bring this oversight to prominence.

A new imagining of a more sustainable system would have the household and state elevated to their property significance as equal partners alongside markets , all embedded within the society and the natural environment. This richer picture and “cast of characters” provides a better foundation.


By far the key point in Raworth’s ideas though is the underlying concept of economic (GDP) growth. It’s such a fundamental, almost axiomatic, concept almost every macro economic or finance analysis starts with growth forecasts for this year, next year as a given foundation for everything else, and it is rarely asked where the growth curve goes. Can a finite planet really sustain an ever upward growth curve?

Yes, growth has and continues to lift billions of people out of poverty and helped them live better lives , but in the developed world , why should economic growth still be a priority? Can we really envisage an economy 50x larger in 100 years.

The debate among sustainability advocates seems to come down to green-growth vs de-growth with Raworth in the latter camp. Even the architect of the GDP measure, she tells, rails against its almost ubiquitous usage. Critics of the measure have been vocal for decades (JFK made a famous one) but despite all the caveats and the shortcomings it STILL dominates economic and financial thinking.

Presumably because it is so seductive as a neatly measurable concept , it gives a beautifully simple answer to such a complex question that we can’t help but hand onto the certainty and clarity it seems to provide in a complex world. And therein lies the problem. The power of single, simple numbers to summarise complex areas holds a powerful sway over us (and can lead us badly astray).

We have created economies that grow whether or not we thrive, we need economies where humans thrive whether or not economies grow.

Kate Raworth

The use of negative words like “stagnation” in the conventional literature to describe this sort of state is quite telling and you can see how no growth is deeply embedded as a bad thing, but is it?

Investing in de-growth

But here’s my question – what do equity markets look like in a world where overall growth is flat? Many simple equity models start from GDP growth as a key driver of equity returns, does that imply much lower or zero returns in de-growth? Or conversely, with long term interest rates close to zero in many parts of the developed world is this outcome in fact already priced in by the market? Leading to a permanent state of low rates, plentiful availability of capital and high asset valuations? Does de-growth change the fundamentals of investing? or are those finance models in need of a review as much as the economic models debunked in Raworth’s book?

Raworth provides a neat summary of her 7 key points , complete with imagery and metaphors in what she sees as the main economic concepts that need re-imagining:

Its quite amazing actually how tugging gently on some of the founding threads of economics can make them unravel so easily. It’s easy to nod along to these very sensible ideas but switch back in work mode to accepting ideas built off a foundation of infinite growth (I’m as guilty of this as anyone).

So let me challenge you – next time an economist in a suit and tie starts their analysis talking about GDP growth in the developed world , why not challenge them:

why this growth? To what end? Is GDP growth essential to investment returns?

What level of inequality is built into this growth?

How much natural resource depletion, how much environmental damage is allowed for in these growth numbers?

Tough but important questions, that don’t get asked anywhere near enough.

2 thoughts on “What if everything you were taught about economics & finance was wrong?

Leave a Reply